TOWACO, NJ (Mar. 12, 1998) -- At around 3 p.m. this afternoon, the
Cash-King Portfolio purchased our RP4 stocks: General Motors, Exxon, Eastman
Kodak, and Chevron. We tried to spend equally on the four, though the share
prices obviously force a few dollars extra here, a couple fewer there. Click
"Thursday's Numbers" to get a look at the final tallies.
Now, on to today's report...

There has been some discussion on the Cash-King Web Board recently about
the subject of diversification. Some Fools think our twelve stocks isn't
defensive enough; others opined that diversification beyond a handful of
stocks reduces your potential gains.

This is the sort of debate I love to see in Fooldom. The financial media
sometimes bizarrely misrepresents this forum as being one driven by herd
mentality, a cult of rookie investors all acting on online hype. (Zzzz.)
A snoozer argument... but nice try.

What's really happening in Fooldom is that nearly a million people each month
are choosing to discuss and debate (always politely, in C-Kdom) the merits
of given investment approaches, the value of particular businesses, the best
way to buy a new car, et cetera. It's a non-restricted, open forum for debate...
a model that is radically changing how Wall Street and the money world works.

Just take our recent discussion on diversification, as an example. All of
us end up in unique situations -- with different dollar amounts to invest,
different time horizons, different investment holdings, and different goals.
The public discussion of this in the Cash-King folder is a way for us all
to hear what others are doing, to challenge assumptions, and to reconfigure
our portfolio if we feel it necessary.

Today I'll consider this issue of diversification, and I'd actually like
to focus on a response to those Fools who think that our twelve-stock portfolio
is over-diversified. Some investors in our area are allocating seemingly
large portfolios in 3-5 different stocks, and certainly many of them will
do very well as investors. Let me explain, though, why we're holding more
positions.

If we absolutely knew -- beyond a shadow of a doubt -- that we could pick
3 to 5 long-term market-beaters, we'd be more than happy to load all of our
money into them. And wed use all of our future savings to purchase
more shares of those companies. Then we'd never have to research another
business. We'd be approaching the markets from the "Put all your golden eggs
in one basket, and watch that basket" vantage point. And that would leave
us with even more time than your average Cash-King investor to go rafting
down the Yellowstone River, to read the collected works of Mark Twain, or
to play whiffle ball with the kids.

What a great deal! We'd limit the number of decisions to make, we'd increase
our returns, and we'd free up additional time to pursue numerous other interests.
What a great deal.

The problem with that theory, though, is that when it comes to investing,
theres no such thing as a sure thing. This mantra applies whether
were talking about small-cap, mid-cap, or large cap stocks and even
includes our beloved Cash-Kings. Check our buy reports for each of the stocks
that weve purchased so far 
Microsoft,
Pfizer,
T.
Rowe Price,
Intel
and
Coca-Cola.
You'll see that we recognize potential risks in owning each of these stocks.

Mind you, we love our general approach here. It's strict -- no matter how
diligent we are in our research, virtually no stocks that we select will
meet all of our expectations. Coca-Cola appears to be the one with the best
shot at it. But that doesn't guarantee that Coca-Cola won't hit hard times.
In the 1970s, Coke's CEO was afflicted with Alzheimer's, and the company's
operations wobbled. We believe that, under horribly adverse circumstances,
any one of our investments could topple.

I'll give you two examples. If you check the predecessors to the Cash-King
Portfolio (see Step
1 of the 11 Steps to Cash-King Investing), youll see that both
of these portfolios included a dog. The Simpleton Portfolio had its Silicon
Graphics -- grrrr,grrrr. And the Money-Heavy Portfolio had its Oxford
Health Plans -- see Spot chewing on a Booda-bone.Yet, despite their
dogs, so far these portfolios have rather dramatically outperformed the market's
return (no word from the financial media on that yet!).

The market-beating Fool Portfolio has had a dog or two (and more) as well.
There was ATC Communications -- Lassie, don't come home -- which was
sold at an 85% loss last year. And even The Foolish Four model, which has
thrashed the market for three decades running, got a bunch of Fools into
Woolworth five years back... howwwwww-oooo... !

Every dog has its day. And I think that even every market-beating portfolio
has its dog(s).

You might insist that these dogs could have been avoided. But the principles
of 20-20 hindsight do have a way of misleading our foresight. At the time
that each of these stocks was included in the relevant portfolio, there were
valid reasons for their inclusion. And, in many ways, it was because of the
inclusion of these sorts of stocks that the portfolios also purchased some
monster winners. The two can't cleanly be divorced in my mind. You have to
err to succeed. You see, it may just be that even if you are Warren Buffett
(or particularly if you are), you can't find American Express or Capital
Cities/ABC without suffering through US Air or Berkshire's textile operations,
first.

This doesn't mean that we can't learn from our mistakes. We must try to.
It also doesnt mean that we shouldn't fight to avoid future mistakes.
But I personally am uncomfortable with the idea that any of your Cash-King
managers here are so expert that a 3-5 stock portfolio would suffice. If
a dog shows up, investors with only a few holdings run the risk of substantially
underperforming the market. Two blunders and the investor is doomed. Can't
you imagine that happening? Think on these scenarios. One of your errors
ends up coming from dishonest financial accounting by your company that no
one foresaw. The second one came from a class-action liability suit that
would've been nearly impossible to predict.

Two mistakes in a three-stock portfolio, and you're toast.

I think that oftentimes, more broadly-defined portfolios (10-20 stocks) end
up being carried by one or two stocks that deliver such extraordinary returns.
As they double, triple, quintuple, then gain ten-bagger status, they push
the entire boat higher. If you're picking from great companies, I honestly
believe that you reduce the risk of your overall portfolio with a dozen holdings,
without diluting the force of two phenomenal performers.

The Fool Portfolio is a great example of this concept. They hold between
10-15 stocks, have had a healthy mix of great winners, market-performers
and losers. But two of their stocks (Iomega and America Online) have led
that portfolio to market-beating returns since its inception. No surprise
that the harsh critics of The Fool Portfolio aren't money managers. They
haven't been exposed to how portfolios beat the market by riding a few huge
winners to monstrous long-term gains. For Buffett, Coca-Cola at times has
represented 50% of his investments.

To my eye, though, securing those 2-3 monsters is very difficult to do, if
you limit your total selection to 3-5 stocks. While it's certainly true that
owning fewer stocks increases your chance of outperforming the market, I
think that relative to that upside, it more substantially increases your
risk of underperforming the market.

For us, the perfect number is between 10-20, more likely between 10-15
businesses. More than that, and you do risk diluting a few great performers.
And more importantly, it's tough to follow that many businesses, and still
live! My guess is that investing is not a profession for those of you that
are reading this report. If youre like me, I suspect that you dont
have the time to research and follow more than ten companies. Once you get
beyond that, I think it likely that 1) there will be too much regression
of your portfolios performance towards the level of the market, and
2) you'll ultimately think of investing as a burden that eats into your social
life. (Ask Tom -- his social life is pathetic!)

I'll see you tomorrow in this column, if I still have a job after that
parenthetical.